Burned once, oil producers approach new price boom cautiously
By Jad Mouawad and Eduardo Porter The New York Times

WEDNESDAY, FEBRUARY 1, 2006

DUBAI, United Arab Emirates In a city of superlatives, Burj Dubai is supposed to top them all.

The Burj, whose name means tower in Arabic, is set to become the world's tallest skyscraper in 2008, looming to a height of more than 790 meters, or 2,600 feet, in a new neighborhood of offices and residential buildings.

But more important, the rival to Burj Dubai's dizzying heights will not be the current title holder, Taipei 101, at 510 meters, or even Freedom Tower, in New York, at its symbolic height of 540 meters.

Past the Mall of the Emirates, which as the only indoor skiing slope in the Middle East, past the artificial islands shaped like palm trees and past the Burj Al Arab, which looks like a giant sail and offers rooms for as much as $13,900 for a single night, another developer is planning a tower 700 meters tall. Known as Al Burj, or The Tower, it will be the hub of a residential village for half a million people.

Or will it?

Once again, countries on the Arabian peninsula are going through an oil boom, the third in three decades. And just as in the 1970s and 1980s, their coffers are spilling over with cash, and they will be tempted again to spend lavishly.

But despite the extravagance on display in Dubai, which with little oil is going all-out to become a financial and commercial center, the region's main producers, from Saudi Arabia to Kuwait, are behaving in a much more disciplined fashion.

Haunted by memories of the busts that followed prior booms, most governments have so far behaved cautiously and privately and are only now beginning to loosen up their purse strings.

"The question many have in the region is how not to squander the wealth like they did in the 1970s," said Rachel Bronson, a specialist on Saudi Arabia at the Council on Foreign Relations in New York.

Deep within the halls of the Ministries Complexes in Kuwait City, a vast cluster of buildings that houses the country's government, Bader al-Saad, who runs the Kuwait Investment Authority from a large office just next door to the finance minister, speaks to the region's new-found fiscal sophistication.

"People are asking where are all the petrodollars and why we have not seen anything like the spending of the '70s and '80s," Saad said in a recent interview. "The truth is, a lot of the petrodollars are being reinvested domestically. I think in the fiscal policy there are a lot of lessons that have been learned from previous experience"

In interviews in Saudi Arabia, Kuwait and Dubai over the past two months, dozens of local analysts and policy makers have made the same point.

Oil producers have wised up. More money is saved than ever before; more jobs are being created in the private sector; real estate and stock markets are booming; and governments are encouraging a diversification of their economies to move them away from oil's increasingly volatile cycles.

Part of the reason, of course, is that the region's governments face a much larger and younger population than they did three decades ago, forcing them to diversify to create jobs.

Saudi Arabia's recent entry into the World Trade Organization, for example, after 12 years of negotiations, illustrates the kingdom's new priorities in terms of economic growth and development.

Saudi Arabia is confronting its expensive missteps of the 1980s, when for example, it tried to used its oil windfall to become an agricultural powerhouse. It spent billions of dollars to irrigate the kingdom's arid lands and grow crops. In less than a decade, it became the world's sixth-largest wheat producer.

But eventually oil prices collapsed, the Saudi government ran out of money, and food production plummeted for lack of subsidies. The valiant, costly effort to make the desert bloom proved a mixed success. Along with palatial resorts in the south of France and customized Boeing 747s, the attempt joined a the long list of financial follies.

"Unlike in the United States, where it feels like high prices are going to last forever, in the Middle East, the feeling is that it will not last," Bronson said. "So how do you avoid the problems of the 1980s that followed the boom of the 1970s?"

One sign of the conservative outlook prevailing among finance ministries around the Gulf is that governments are still drawing up their budgets based on oil at $30 a barrel, nearly half of the current price, said Mohsin Khan, the director for the Middle East and Central Asia at the International Monetary Fund.

Analysts following the oil policies of Organization of the Petroleum Exporting Countries members say the group is seeking to defend a minimum price of $55 a barrel and, if needed, would be willing to cut production to maintain prices above that level. That policy, never voiced officially by any OPEC representative, is meant to avoid a repeat of the 1998 price collapse, which nearly bankrupted producers.

The difficulty in forecasting oil prices helps explain why, with few exceptions, the region's oil states have not significantly increased their investment in public projects.

And regional governments have also used part of their stash to pay down debt, reducing it from about 40 percent of gross domestic product in 2004, on average, to 20 percent last year.

After the 1973 oil shock, government spending in the Middle East swallowed more than 80 percent of the increase in government revenue. Between 2003 and 2005, by contrast, public spending took up less than 40 percent of the new revenue, according to IMF estimates.

Much of the rest went into savings that are now being recycled into investments around the globe. Last year, Dubai bought $1 billion of DaimlerChrysler shares; it purchased Tussauds Group, Europe's largest tourist-attractions operator; and it made a $5.8 billion bid for Peninsular & Oriental Steam Navigation, a British shipping company.

Other governments are doing the same, including the investment arms of Abu Dhabi and Kuwait, which have both been in talks to buy a chunk of Industrial & Commercial Bank of China.

Abu Dhabi's investment arm is believed to be managing more than $250 billion, for example. The Kuwait Investment Authority receives 10 percent of the country's oil sales and controls a fund estimated at more than $100 billion.

Much of the Arab world's new wealth ends up in the United States, in Treasury bonds, as well as in corporate and other government debt instruments and helps fund America's enormous trade deficit.